Where Will My Money Come From in Retirement?

For most of your working life, you know exactly where your income is coming from. Every two weeks, a paycheck lands in your account.

Then you retire—and suddenly, you're responsible for creating the paycheck yourself.

That's a shift I talk about often with clients approaching retirement. Even for people who have saved diligently and accumulated significant assets, it can feel strange to go from earning a regular paycheck to relying on the assets you've spent decades building.

One of the most common questions I hear is a simple one: Where will my money actually come from in retirement?

The answer is different for every person and every family. In fact, this is part of why retirement planning isn't always as simple or straightforward as we'd like it to be. Two people can retire at the same age with similar levels of wealth and have completely different retirement income strategies based on where their assets are held, their tax situation, Social Security benefits, pensions, other sources of income and, of course, how they want to live.

While this is by no means an exhaustive list, there are several common sources we tend to see when building a retirement income plan.

Social Security

For many retirees, Social Security provides a foundation of consistent income throughout retirement.

But there's an important decision attached to it: When should you start taking it?

You can begin Social Security before your full retirement age, wait until full retirement age or potentially delay benefits further. The timing affects the amount you receive, and decisions may also need to take a spouse's benefits and broader financial situation into consideration.

There's no one age that's automatically "best." The right timing depends on the rest of your plan.

Traditional Retirement Accounts

For many people, accounts such as 401(k)s, 403(b)s and traditional IRAs represent a significant portion of their retirement savings.

You may have spent 30 or 40 years contributing to these accounts, and retirement is when they begin transitioning from savings vehicles into potential sources of income.

Generally, contributions to traditional retirement accounts were made pre-tax, and withdrawals are taxable as ordinary income. Eventually, required minimum distributions, or RMDs, also enter the picture.

That tax treatment becomes an important consideration when we're deciding not just how much to withdraw, but when to withdraw it.

Roth Accounts

Roth IRAs and Roth 401(k)s give us another potential source of retirement funds, but with different tax characteristics.

Qualified Roth withdrawals are generally tax-free, which can make these accounts particularly useful when we're trying to manage taxable income from year to year.

Having assets with different tax treatments can provide valuable flexibility in retirement. Rather than every dollar coming from the same type of account and being taxed the same way, we may have options.

Taxable Investment Accounts

Brokerage accounts can also play an important role in creating a retirement paycheck.

These might include stocks, bonds, mutual funds, ETFs or other investments accumulated outside of retirement accounts.

Because taxable accounts have different tax rules than traditional retirement accounts, we often look at them as another piece of the overall income strategy. They can also be particularly helpful during certain "bridge" years—for example, after someone stops working but before Social Security, a pension or another income source begins.

Cash and Cash Equivalents

Cash has a job in retirement, too.

Savings accounts, money market funds, CDs and other cash equivalents may not always offer the same long-term growth potential as investments, but accessibility and stability can be valuable.

How much cash someone should maintain depends on their circumstances, but having money available for near-term spending can help prevent every unexpected expense from requiring an investment decision.

Pensions

Pensions aren't as common as they once were, but they're still an important retirement income source for many people.

Depending on the plan, retirees may have decisions to make about when benefits begin, whether to choose a single-life or survivor benefit, or whether to take a lump sum versus monthly payments if both options are available.

Again, those decisions shouldn't necessarily be made in isolation. A pension is one piece of a much larger retirement picture.

And Then There Are the Less Common Sources

Not everyone's retirement income fits neatly into the categories above.

We also work with people who have other sources of income or assets that need to be incorporated into the plan.

Deferred compensation can be particularly important for executives. Payments may continue for several years after leaving an employer, which can affect how much income needs to come from other assets during the early years of retirement.

Business income or proceeds from the sale of a business may also be part of the equation. Retirement doesn't always mean severing every financial connection to a company you spent decades building.

Rental real estate can provide ongoing income, although it's important to remember that rental income comes with expenses, taxes, maintenance and sometimes more involvement than people anticipate.

Annuities may provide another source of income depending on the type of contract and how it fits into the broader plan.

Consulting, board or part-time income is also increasingly common. Retirement doesn't have to mean that earned income stops completely. Some people leave their primary careers but continue consulting, serving on boards or pursuing other paid work they enjoy.

We also occasionally see trust income, inheritances, royalties, mineral interests and other income-producing assets become part of the retirement picture.

This certainly isn't a complete list. That's really the point: everyone's financial life looks a little different.

The Bigger Question: Which Money Do You Use When?

Knowing where your retirement income can come from is only the beginning.

The real planning comes from determining how all of those sources should work together.

Imagine someone retires in their early 60s with a taxable investment account, a substantial traditional IRA, Roth assets and Social Security available in the future. They may also have a pension beginning several years later or deferred compensation continuing after retirement.

They have plenty of potential places to get money.

But where should their income come from first?

Should they begin Social Security immediately or wait?

Should they spend from the taxable account while allowing retirement accounts to continue growing?

Are there years when taking additional money from a traditional IRA might make sense?

Could a Roth conversion be appropriate during a period when taxable income is lower?

How will future RMDs affect taxable income?

How much cash should remain readily available?

These decisions can affect one another, which is why I don't think retirement income planning can be reduced to a simple withdrawal rate or a single rule of thumb.

The goal isn't simply to determine whether you have enough money to retire. It's to create a thoughtful strategy for how you will use that money once you do.

Your Retirement Paycheck Will Probably Change

Another thing I remind clients is that the retirement income strategy we create for age 62 may look very different from the one we're using at age 75.

In the first few years of retirement, income might come primarily from cash, taxable investments or deferred compensation.

Then Social Security begins. Maybe a pension starts. Later, RMDs become part of the picture.

Spending may change, too. You may travel extensively during the first decade of retirement. Healthcare expenses could become more significant later. You might sell a property, receive an inheritance, make substantial gifts to your children or grandchildren, or experience any number of life changes we can't perfectly predict today.

That's why retirement planning isn't a one-time calculation.

It's an ongoing process of coordinating your income, investments, taxes and spending as your life changes.

Turning Your Savings Into a Paycheck

Retirement can involve a lot of moving pieces, but the goal is actually pretty simple: to turn the assets you've spent decades accumulating into an income stream that supports the life you want to live.

So as you're preparing for retirement, don't stop at asking: "How much have I saved?"

There's another question that's just as important: "Where will my money come from—and how should all of those pieces work together?"

If you're approaching retirement and aren't quite sure how to turn your savings into a retirement paycheck, we'd be happy to help you put the pieces together. Schedule a conversation with our team by clicking here.